The modern cryptocurrency landscape often borrows terms and concepts from traditional finance (TradFi) and one such term is "market capitalization". While its essence remains consistent, the application of this term in crypto holds unique characteristics due to the distinct nature of crypto tokens compared to conventional shares.
This article aims to explain cryptocurrency market cap, its significance, intricacies, explore the concept of fully diluted market cap in crypto and more.
What Is Crypto Market Cap?
In the crypto industry, market capitalization is calculated by multiplying the number of a specific cryptocurrency in circulation by its current market price. For example, if one million units of cryptocurrency AAA are circulating, each priced at $1 each, then the market cap of AAA is $1,000,000. This metric offers insights into a crypto asset's market standing and helps gauge its dominance within the market.
Market cap is often regarded as an indicator of a cryptocurrency’s popularity and value. As of September 2023, Bitcoin (BTC) boasts the largest market cap in the crypto space, exceeding $500 billion, with a market dominance of 48%. However, it’s essential to note that cryptocurrency market caps are dynamic due to inherent price volatility. Stablecoins which are cryptocurrencies pegged at a 1:1 ratio to fiat currencies or other assets, are an exception to this volatility.
A similar formula applies to the calculation of market capitalization for traditional companies. However, in the crypto world, we deal with circulating units while in TradFi, companies use outstanding shares. This distinction is pivotal; cryptocurrencies have circulating units without stringent quality checkers, whereas companies have shares only after successfully going public — an important quality milestone.
Why Is Market Cap Important in Crypto?
Market capitalization is a crucial metric for several reasons. A cryptocurrency with a high market cap is often considered a more stable investment. It signifies the asset’s ability to withstand bear markets and indicates widespread support from its holders and buyers. Conversely, a low market cap suggests limited public interest, implying that fewer individuals are inclined to support the cryptocurrency in challenging times.
Crypto Market Cap Classification
Cryptocurrency market capitalization is categorized based on value into three tiers:
1. Large-cap cryptocurrencies ($10 billion+)
As of September 2023, only six cryptocurrencies have achieved this remarkable capitalization: USDT, USDC, Bitcoin, Ether, Binance Coin, and XRP. These are generally considered low-risk investments due to their substantial market presence, widespread support across multiple platforms, and consistently high liquidity.
2. Mid-cap cryptocurrencies (from $1 to $10 billion)
More than 30 cryptocurrencies fit into this category as of September 2023. These assets are popular and hold significant potential, though they carry a higher risk compared to top-tier cryptos.
3. Small-cap cryptocurrencies (below $1 billion)
Cryptocurrencies in this category have lower sustainability in a volatile market. Investing in small-cap cryptocurrencies entails considerable risk.
What Is the Total Market Cap?
The total market cap represents the combined value of all active cryptocurrencies at a specific moment. As of September 2023, the cumulative market cap of the crypto world surpasses $1 trillion, with Bitcoin alone accounting for nearly half of this total.
Image source: Companies Market Cap
This places the total crypto market cap below entities like NVIDIA, Amazon, Alphabet (Google), Saudi Aramco, Microsoft, Apple, and precious commodities like Gold and Silver. Currently, Bitcoin ranks 14th globally in terms of market cap.
How to Calculate Market Cap of Crypto?
The market capitalization of a cryptocurrency is determined by multiplying the total number of units of the asset in circulation by its current market price. However, it’s crucial to recognize that there isn't a universal "price" for a cryptocurrency. Even stablecoins have varying rates across different markets, and these rates fluctuate over time based on buying and selling intentions.
Additionally, accurately determining the number of units in circulation can sometimes be challenging. A notable example occurred in the summer of 2020 when debates arose within the crypto community regarding the precise quantity of circulating ETH units. This case highlighted that determining the genuine circulating supply of ETH wasn't straightforward.
What is a Fully Diluted Market Cap?
In addition to the standard market cap, there's another metric influenced by traditional financial conventions known as the fully diluted valuation (FDV). FDV involves multiplying an asset's current price by its entire supply, including coins or tokens not yet in circulation. This metric offers potential investors a glimpse into what the future market cap of a project could be.
A fully diluted market cap is less common than the standard market cap and provides a perspective on the potential financial future of a project. However, it does not predict the future price, and given the cryptocurrency market's volatility, a high FDV does not necessarily indicate a successful investment.
Cryptocurrency market cap is a vital measure that provides an immediate snapshot of a crypto asset's market performance. Cryptocurrencies with significant market caps (exceeding $1 billion) are generally viewed more positively compared to those with smaller valuations. However, it's crucial to acknowledge that higher-risk assets may entice investors seeking greater returns. Ultimately, selecting the most appropriate cryptocurrency to invest in involves multifaceted considerations, with market cap being just one component.
Thankfully, platforms like Coin Market Cap and Coingecko make it convenient for users to review market caps and rankings for almost all cryptocurrencies. Now, you’ve gained insight into why this measurement is crucial and the primary benefits it offers in the world of cryptocurrency.